Service charges, insurance premiums, and commission - Dewar Hogan

Service charges, insurance premiums, and commission

Few things outrage tenants more than learning that their landlord is raking in a commission on the insurance he is arranging for them, which (they naturally tend to believe) is in turn reflected in the size of the insurance premium they are being asked to pay, often through a service charge.

After residential tenants first acquired the right to buy their freehold in the 1990’s, for example, one famous South London landlord brazenly claimed in a leasehold valuation tribunal that a large part of the value of its ground rent interests lay in the opportunity to profit in this way, which sparked a good deal of discussion when the tribunal agreed with them. In our experience it is no longer the custom for tribunals to make an explicit allowance for this possibility when assessing the value, but no doubt the comparables used to assess the value of the freehold interest itself reflect a sum of the money which the market will pay for this benefit.

There have been for a long time and continue to be regulatory rumblings about this, normally related to proposals requiring landlords to reveal the commission they receive rather than outlawing the practice altogether, but nothing has actually been done and there doesn’t appear to be any likelihood of any statutory or regulatory interference any time soon.

Residential tenants at least have the protection of the Landlord and Tenant Act 1985, which requires that insurance premiums recharged to tenants can only be recovered if they are reasonably incurred and reasonable in amount. Following a long battle some tenants in 2011 succeeded in getting their landlord’s commission reduced from 23.5% to 10% by a tribunal, which gained some publicity and has emboldened other residential tenants to follow in their footsteps.

What of commercial tenants, however, who enjoy no such statutory protection? What if they think (quite often correctly, in the author’s cynical world view) that their landlord is obtaining an excessive kickback at their expense in this way? The issue may be an important one for multiple occupiers, particularly retailers.

The starting point, as always, is the terms of the lease. However, this seldom has anything to say on this subject, so that observation doesn’t really help.

The tenant therefore tends to find himself thrown back on arguing that there are implied terms. There are quite a variety of such arguments. For instance:-

  • That the insurance premium has to have been reasonably incurred, reasonable in amount, or some such.
  • That the insurance premium has at least to have been properly incurred, meaning something like ‘negotiated at arm’s length in the market’.
  • That the landlord’s ‘cost’ of insurance is the cost he pays out less any commission he receives.

This kind of argument is quite fact-specific and it isn’t possible to say whether it will succeed or fail at a general level, but as a rule tenants have not had much success with them in the courts. A large part of the trouble is that actually it’s very difficult to establish what commission the landlord is receiving. Apart from the fact that generally the tenant has no right to know this, landlords have got cleverer at disguising it – even Southwark Borough Council in one leading case learned over the years to describe it as a ‘local claims handling fee’ rather than a ‘commission’, while less subtle methods such as simply paying the commission in cash are not unknown in certain circles.

What can certainly be said is that it’s no use paying the amounts demanded ‘under protest’ and then hoping to get them back. This is worse than useless because it demonstrates that the tenant already knew there was an argument and decided to pay anyway. If the tenant hopes to recover previous payments should it succeed, it will only be able to do so if it can show that the payments were made under some mistaken impression (i.e. most probably that the tenant was indeed liable for them).

Retailers, restaurateurs and others have not paid a great deal of attention to this issue so far but with business rates and other expenses increasing its likely to work its way up the agenda quite soon.